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Home > The Share Centre Blog > 2013 > July > Bull and Bear: US and UK on the up, Eurozone flat, China and emerging Asia struggle

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Bull and Bear: US and UK on the up, Eurozone flat, China and emerging Asia struggle

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include: The US recovery back on, just. Evidence of new US manufacturing recovery. Carney waves magic wand. Eurozone sees lift, but jobs data shows the downside and the region is still in recession. Asia sees falls, Australia sees rise, but …Carney’s first day

The US recovery back on, just

There are certain tests. If the Fed is to begin the slow process of tightening monetary policy soon, then certain things must happen first. The first of those happenings occurred yesterday.

Most of the news coming out of the US has been encouraging of late, but one particular set of data put a dampener on things. Last month the Purchasing Managers’ Indices (PMIs) on the US were unambiguous. Q2 was not going to be as good as Q1. The PMI for US manufacturing fell below the critical no-change marker of 50 in May. But yesterday saw the release of the PMI for US manufacturing for June, what did it say?

The index rose from 49 last month to 50.9. That is nothing startling, but it is an improvement, and that needs celebrating. A sub index tracking new orders – which is a good forward indicator – rose from 48.8 to 51.9, and the index tracking new export orders surged from 51 to 54.4.

Evidence of new US manufacturing recovery

All around there is talk at the moment that US manufacturing is seeing a return to the glory days, or at least a return to better days, as unit labour costs in China rise relative to those in the US. It is hard to see the evidence of this in the PMI data, although the rise in new exports was encouraging.

Bear: Three negatives lurk in the data. Firstly, the PMI tracking employment in the manufacturing sector fell from 50.1 to 48.7, suggesting the index lost jobs last month. Secondly, the PMI measuring prices paid rose from 49.5 to 52.4 – which is a worrying trend. Thirdly, the PMI for US imports rose to 56, which is even higher than the one measuring new export orders.

Overall: This report is more good than bad, and suggests that June was a better month for the US economy. But there is precious little evidence of the much talked about re-birth of US manufacturing in the figures.

The latest jobs report from the US will be out on Friday. Let’s see what news that brings.

Carney waves magic wand

The UK experienced two pieces of good news yesterday. What a clever fellow that Mark Carney is. If he can achieve that in a day, just imagine what he can do in a week.

First there was the latest PMI for UK manufacturing. This rose to 52.5, which was a 25 month high. More encouragingly, the sub-index tracking new orders rose to its highest level since February 2011. Markit which, along with CIPS, compiles the PMI data said: “Manufacturers reported solid demand from domestic markets and clients based in Europe, China, North America, Scandinavia and the Middle East. A number of companies linked improved inflows of new work to strengthening confidence among clients and consumers, better weather conditions and the launch of new product lines.”

A bit of bull and a bit of bear: More good news in the data relates to inflation, with average factory gate prices falling for the first time in three-and-a-half -years. Less encouragingly, the index tracking employment indicated zero growth in employment.

Markit reckons the data suggests the UK’s growth is now at least 0.5 per cent.

Services see exports lift; manufacturing not far behind

But not only was Mark Carney able to create a recovery in UK manufacturing during the month prior to him joining the Bank of England, but, even more impressively, he has already created signs of an export recovery in the services sector.

The British Chambers of Commerce has been busy producing its latest quarterly economic report. It was a good one.

For both manufacturing and services, most key domestic balances are stronger in Q2 than in Q1. Service deliveries rose three points to +36 per cent (the highest since the survey started in 1989), while orders rose three points to +29 per cent (the highest since 1994).

Business confidence increased again and is much stronger than average levels during the recession. Manufacturing confidence that turnover will improve rose seven points to +51 per cent; service sector confidence rose six points to +46 per cent. Profitability confidence rose from +33 per cent to +39 per cent for manufacturing, and from +22 per cent to +34 per cent in services.

The investment picture however was mixed. While the balance of manufacturing firms looking to increase investment in plant and machinery rose nine points to +23 per cent, for services it fell two points to +7 per cent.

Bear: But there is a negative relating to the BCC data. Sure most of the various balances the BCC produces were up, and they were above the average levels seen during the recession. But for both manufacturing and services they remain below pre-recession levels seen in 2007.

Conclusion: Both the PMI relating to exports and BCC balances seem to point to exports leading growth, and just for a moment, enjoy the news, because it really is encouraging – especially when you consider how weak the UK’s main trading partner, the Eurozone, is at the moment.

Eurozone sees lift, but jobs data shows the downside and the region is still in recession

It is difficult to know whether to laugh with relief or cry in frustration over the latest PMI on Eurozone manufacturing. The headline index for the region as a whole hit a 16 month high in June. But with a reading of 48.8, it still points to recession.

But, and let’s be bullish for a moment, the news on Spain was encouraging. The PMI for Spanish manufacturing hit 50, which was a 26 month high. Since any reading over 50 denotes growth, the PMI seems to suggest that Spanish manufacturing is moving out of recession. So that really is something of which we should take note. Let’s hope the index can continue to improve next month.

So it is good to see all those ‘highs’ but then again, note that only Ireland has a PMI of more than 50. The fall seen in Germany is a little surprising with other data being more encouraging of late.

The story of Eurozone employment is less positive. The last stats from Eurostat were out yesterday. The euro area seasonally-adjusted employment rate was 12.1 per cent in May 2013, up from 12.0 per cent in April. The EU27 unemployment rate was 10.9 per cent, which was stable compared with the previous month. In both zones, rates have risen markedly compared with May 2012, when they were 11.3 per cent and 10.4 per cent respectively.

The lowest unemployment rates were recorded in Austria (4.7 per cent), Germany (5.3 per cent) and Luxembourg (5.7 per cent), and the highest in Spain (26.9 per cent) and Greece (26.8 per cent in March 2013). Compared with a year ago, the unemployment rate increased in seventeen Member States and fell in ten. The highest increases were registered in Cyprus (11.4 per cent to 16.3 per cent), Greece (22.2 per cent to 26.8 per cent between March 2012 and March 2013) and Slovenia (8.6 per cent to 11.2 per cent). The largest decreases were observed in Latvia (15.5 per cent to 12.4 per cent between the first quarters of 2012 and 2013), Estonia (10.0 per cent to 8.3 per cent between April 2012 and April 2013) and Lithuania (13.3 per cent to 11.7 per cent).

Asia sees falls, Australia sees rise, but …

As for Asia, PMIs for China, India, South Korea, Taiwan, Indonesia and Vietnam were all down. Of these, only in South Korea and Indonesia are the PMIs comfortably above 50, although the PMI for India is still over 50 – but only just.

The PMI for Vietnam points to sharp contraction.

As for China, the news was a tad mixed. Both the official version and the version produced by HSBC/Markit were down, but the fall was not as great as many had feared given the recent credit crunch in China. The HSBC/Markit PMI fell from 49.2 to 48.2, the lowest since September 2012.The official PMI fell from May’s 50.8 to 50.1.

Australia is a bit more interesting. As has been pointed out here before, household debt remains high down under, and house prices seem overvalued. If rates rise globally, Australia may feel the pain more intensely than most countries. Talk is that Australia could be heading for recession. As this piece on Bloomberg points out, the new Prime Minister Kevin Rudd is beginning to pitch his government as the one to steer Australia through recession. See: Australia Recession Risk Flagged by Rudd in Rhetoric Shift

The PMIs on Australia are not so clear. For some time they have been pointing to recession in the country’s manufacturing sector. This did not change in June. The main PMI did improve significantly, however, rising to 49.6, which was the highest reading since February 2011. Alas, the PMI measuring new orders in Austria’s manufacturing sector is still deeply into contraction territory.

Moving on from Asia to South America, the latest PMI for Brazil was 50.4, the same as in May. Actually there is a puzzle in Brazil with official data on industrial output pointing to robust growth.

Carney’s first day

And finally we learnt a lot about Mark Carney yesterday, but did we learn enough? We learnt that he took the tube into work; he met staff, and had dinner with George Osborne – how nice. But media coverage on what he had for breakfast, what colour his socks were, and indeed whether he wore matching socks and pants was scarce indeed. How can we possibly make a judgement about Mr Carney’s ability to save the UK without this information? Come on! Where are the investigative journalists giving us the facts we really need?

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

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